403(b) Outlook Bonding/Fiduciary Liability Insurance

What is the rule? ERISA generally requires that every person who “handles” plan assets be bonded. A person handles funds whenever his or her duties create a risk that the funds or other property could be lost in the event of fraud or dishonesty. Those who have the authority to sign checks, endorse instruments, or decide to disburse funds are considered to handle funds and, therefore, must be bonded.

The bond protects plan assets against theft or other misappropriation by the person or persons handling those assets. Generally the amount of the bond must not be less than 10 percent of the funds handled but, at minimum, must be $1,000. However, the bond does not need to be greater than $500,000.

TIAA-CREF-funded plans. You need to be bonded if you are administering a plan funded with TIAA-CREF mutual funds or institutionally owned annuity contracts. You do not need to be bonded if your plan is funded with TIAA-CREF individual or group annuity contracts or certificates because you do not handle the funds. The reason: For individual and group annuity contracts, funds do not become plan assets until contributed to the annuities. Once the funds have been contributed no plan official has any control over them.

Your responsibility: Many of our clients have plans that are funded with mutual funds and/or institutionally-owned annuity contacts, i.e., Retirement Choice Annuities. Under the group custodial agreements through which mutual funds are offered, and Retirement Choice Annuities, an institution has the authority to move funds to other plan funding vehicles. As a result, these plan administrators handle the funds, as defined, and must be bonded. You should consult with your legal advisors for specific information about how you can meet ERISA’s bonding requirements.

Fiduciary liability insurance: It’s generally a good idea for plan fiduciaries to purchase liability insurance. Fiduciary insurance paid by the plan out of plan assets must provide that in the event there is a fiduciary breach, the insurance company has recourse against the fiduciary. In other words, insurance bought by the plan cannot indemnify the fiduciary if the fiduciary is liable for a breach. A fiduciary or employer can purchase non-recourse fiduciary insurance (which may be expensive), but cannot use plan assets.

Fiduciary insurance is underwritten by property and casualty insurance companies. TIAA is a life insurance company and does not have the authority to underwrite liability insurance. According to insurance laws and ERISA TIAA cannot purchase fiduciary insurance for plans that fund their plans with its contracts. Consult with your legal advisor for more information.